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700.4. If a permanent is indestructible, rules and effects can’t destroy it. (See rule 701.6, “Destroy.”) Such permanents are not
destroyed by lethal damage, and they ignore the lethal-damage
state-based action (see rule 704.5g). Rules or effects may cause an
indestructible permanent to be sacrificed, put into a graveyard, or
exiled."

The rules for destroy says:

701.6. Destroy
701.6a To destroy a permanent, move it from the battlefield to its owner’s graveyard.
701.6b The only ways a permanent can be destroyed are as a result of an effect that uses the word “destroy” or as a result of the
state-based actions that check for lethal damage (see rule 704.5g) or
damage from a source with deathtouch (see rule 704.5h). If a permanent
is put into its owner’s graveyard for any other reason, it hasn’t been
“destroyed.”

If a creature dealt damage this way would die this turn, exile it
instead

Now, from my understanding of these rules, since the Colossus wouldn't die since it's indestructable, if they got enough lethal damage on it with Pillar of Flames being used on it, the colossus wouldn't be exiled since it would not die. Is my understanding correct?

To expand upon Hyppy's answer, it would be helpful to know the definition of "die".

700.6. The term dies means “is put into a graveyard from the battlefield.” It is used only when referring to creatures.

As Hyppy points out, the rules text for Pillar of Flame is a replacement effect.

If a creature dealt damage this way would die this turn, exile it instead.

It modifies what happens if the creature is destroyed, moving the creature to exile instead of the graveyard. Since Blightsteel Colossus isn't destroyed by lethal damage rules, or any other rules for that matter, there is no "dies" event to replace.

Interestingly enough, even if Blightsteel Colossus wasn't indestructible, it probably still wouldn't get exiled by Pillar of Flame.

According to 616.1: If two or more replacement and/or prevention effects are attempting to modify the way an event affects an object or player, the affected object's controller (or its owner if it has no controller) or the affected player chooses one to apply, following the steps listed below. If two or more players have to make these choices at the same time, choices are made in APNAP order (see rule 101.4).

An non-indestructible Blightsteel destroyed by (or one sacrificed after taking damage from) Pillar of Flame has two replacement effects, the one on the Colossus stating to shuffle it into the library instead of placing it in the graveyard, and the exile effect on Pillar of Flame. The controller of the Colossus must choose one of these to apply, and it seems pretty likely that they would choose the shuffle option.

Given that the Colossus is indestructible, as has been stated, if you use Pillar of Flames, it will still take that 2 damage. If you could then somehow get the toughness to 0 or below (a morbid Tragic Slip, for instance), in the same turn, it would indeed be exiled.

EDIT

As has been pointed out, you'd still have to deal with the double replacement effects. As WLPhoenix, the controller would get to decide what happens, and honestly, why would he exile it?

You bring up a good point about getting it to 'die'. But are you sure it would be exiled? The answer provided by WLPhoenix contradicts this one.
–
Colin DApr 5 '13 at 19:26

Tragic Slip doesn't put any counters on the creature it targets. And even if you did use a Tragic Slip with morbid on a Blightsteel Colossus, you'd still have the issue WLPhoenix brought up, that there are two competing replacement effects, so the Colossus' controller would get to choose whether it gets exiled or shuffled into its owner's library.
–
David ZApr 5 '13 at 19:26